a098  1040  25 Mar 87
PM-Business Mirror, Adv 26,0658
$adv 26
For Release PMs Thursday, March 26
The Family Way of Financing Homes
By JOHN CUNNIFF
AP Business Analyst
    NEW YORK (AP) - There is a family way to finance houses that
produces a win-win situation, and it is practiced by an uncalculated
but probably large number of families.
    In some instances it can provide an otherwise unattainable loan for
an offspring's downpayment on a home, as well as income and a tax
deduction for the parents.
    It could even provide the latter with greater financial security in
retirement.
    The situation arises through a combination of demographic, economic
and tax factors, important among them being these:
    - The very housing inflation that has left homeowning parents
sitting atop a pile of equity is the identical reason why offspring
cannot afford housing.
    - Young couples quite likely are in one of the most difficult
financial periods of their lives (the other important one being
retirement). Incomes are low; obligations - housing, furniture,
children, education - are high.
    - Empty nesters - parents whose children are out on their own -
often have the opposite situation. Income is probably at a career
peak, while many of the costliest financial obligations are behind
them.
    - Tax law permits each parent to give as many $10,000 gifts as they
choose in a year without incurring gift taxes. It also allows them to
borrow their home equity, and offset part of the interest cost with a
tax deduction.
    - Home borrowing costs are among the lowest in the financial
marketplace. The tax deduction on interest incurred through borrowing
home equity makes them even lower. That deduction is not available on
most other interest payments.
    All this produces a situation that conceivably can be profitable for
both parents and offspring.
    If parents provide a gift toward a downpayment on their child's
house,  they avoid gift taxes while, in effect, beginning an orderly
transfer of assets from one generation to the next.
    If the gift money comes from a loan the parents take on their home
equity, the interest they incur might be tax deductible, and
deductions are a rarity under the new tax law.
    Whatever the source, the money lent to the offspring can provide a
return not easily available in other investments. Where else can the
parent obtain a 9 percent or 10 percent return, and such good
collateral?
    Since the offspring are at a difficult time of their lives
financially, the interest payments might be structured on a
graduating level. That is, repayment might be delayed for several
years, and then increase incrementally.
    Such gradual increases would allow repayments to be adjusted to the
offspring's income, which can be expected to rise. True, their
financial obligations are rising too, but every little bit of help is
welcome.
    The offspring's equity in the house, incidentally, also can be
expected to rise, through repayments on the home mortgage and, most
likely, a degree of apreciation. The latter is not assured, but it
has been the recent experience.
    By keeping the money in the family, it is conceivable and even
likely that both borrower and lender win. Each is provided with an
investment, the parents in the loan to their offspring, the offspring
in the home they purchase.
    In each instance the collateral is the best, and the tax breaks,
rare these days, cannot easily be matched. It can be, as dealers like
to say, a win-win situation, while providing an orderly transfer of
assets between generations.
    A moral argument, designed to raise the blood pressure of parents
and probably veto the deal, is sometimes employed as a convincer.
    It is this: In effect, parents have borrowed from their offspring's
generation by misusing the nation's assets through big government
spending, borrowing and inflation. It's about time THEY repaid the
loan.
    End Adv PMs Thursday, March 26.
    
AP-NY-03-25-87 1339EST
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